Buying a business can be difficult if you don’t have the funds.
There are ways to buy a business and settle on the transaction without the funds and without spending your own money, or lending money from a traditional lender.
1. Vendor financing
Vendor financing is a loan arrangement with the seller for the repayment of the purchase price, plus interest, allowing you to preserve your own funds and borrowing capacity with the bank.
The loan could be repaid in increments over an agreed time following completion out of future profits of the business. To ensure the loan is repaid, the seller might require security over the assets and the future income of the business and a personal guarantee. If you default on the loan, the security enables the seller to claw back the assets or access the funds generated by the business or make a claim on you personally for the amount.
2. Leveraging the assets
Businesses that are rich in assets offer internal restructuring opportunities, which might be used to fund the business.
Instead of owning the assets to operate the business, the assets could be leased and the existing assets sold. The funds from the sale of the assets could be used as working capital or to pay the seller for the business.
Alternatively, the assets could be used as security for a loan. The amount of the loan might be less than the value of the assets, as the assets are usually calculated on what they would sell at an auction in case the assets need to be sold quickly by the financier if the loan is in default.
Before undertaking this strategy, verify that the Seller owns the assets and the assets can be used as collateral. If the assets are already secured by a finance company, the finance must be released before the assets are sold or secured by another loan.
3. Leveraging the projected income
A loan can be obtained by borrowing against the projected income of the business, or any outstanding invoices. A loan might not be able to be obtained for 100% of the debts. The financier might stipulate that only invoices with due payment of thirty days be secured against, rather than using all of the debts owing to the business.
4. Structuring the purchase through equity
Share or equity arrangements through buy-ins or share swaps provide ownership opportunities.
Buy-ins: A buy-in is an arrangement where you can work in the business, and be issued shares in the company that owns the business rather than being paid for that work in cash. Over time your ownership in the company which operates the business increases.
Share swaps: The Seller could be offered shares in the company that is acquiring the business or shares in an existing business you might already own, in return for shares in the company you would like to acquire.
5. Delaying payment depending upon results
If the value of the business is calculated upon future contracts, sales or earnings which have not yet been received by the business, you could agree to pay the funds attributed to that future value as an earn-out after completion. If the payment is not received by the business, then no payment would be owing to the Seller.
6. Alternative funding sources
Private equity: Private equity financers and angel investors are alternative funding sources to a bank, who provide funds as a loan or in return for the issue of shares in the company buying the business. The business being acquired must be a viable investment opportunity, or the terms of the loan must be attractive to the investors.
Credit Cards: Credit cards may be used to pay for the purchase and can be repaid from the profit or income of the business after completion.
Joint Ventures: An interest in a business might also be obtained by entering into a joint venture with another person or company that has the funds to buy the business.
Due diligence and the agreement
A combination of strategies can be used to buy a business. However before undertaking any strategy, due diligence on the business must be undertaken and before completion of the sale, the arrangement must be put into writing.
The agreement should include how the purchase price will be repaid; details of any deferred payments; when the risk in the business will pass to the buyer; and the consequences of failing to repay the money.
If the transaction is reliant upon funding documents, these documents should be entered into contemporaneously with the sale agreement for the transaction.
Conclusion
Vendor financing, leveraging the assets and income of the business, using equity and alternative funding sources can be used when buying a business to enable you buy a business when you ordinarily would not be able to afford it; retain your funds and lending capacity, or to defer the payment and the risk of the business.
Due diligence should first be undertaken to understand the business and whether the particular strategy can be completed. The arrangement should also be recorded correctly.
About Sharon Robson
Sharon Robson is Founder and Principal Solicitor of Antler Legal and author of Entrepreneur Know How – Mindset and Winning Steps for Buying a Business.
For more information see www.entknowhow.com/book
Disclaimer
The content in this article is of general nature only and does not constitute legal advice. This content must not be reproduced without the author’s consent.